OECD forecasts BoC rate hike by May. Not so fast
Timing of increase doesn’t jibe with view of economists on the scene
Does the OECD know something that Canadian economists do not? The simply answer: Not likely.
In recent global forecasts, the Organization for Economic Cooperation and Development has predicted the Bank of Canada would begin hiking its key interest rate earlier than private- sector analysts in this country would have ventured.
The Paris- based group did it again on Tuesday, stating matterof- factly in its twice- annual Economic Outlook that the central bank’s policymakers would begin bumping up borrowing costs “in late May of 2015” — many months ahead of when economists here had pencilled in for the first rate move in more than four years.
With the central bank’s trendsetting lending rate at a near- record low one per cent, the OECD said “monetary accommodation will need to be gradually withdrawn to counter i nflationary pressures.”
“The projection assumes this will begin around mid- 2015,” it said.
Trouble is, the OECD prediction doesn’t gel with economists on the ground.
That seems to be their proclivity, to be a little bit more optimistic about the economy and about the eventual rate- hike cycle.
“Their last forecast was also for the bank to raise rates ahead of what the market had been thinking at the time,” said Benjamin Reitzes, senior economist at BMO Capital Markets.
“That seems to be their proclivity, to be a little bit more optimistic about the economy and about the eventual rate- hike cycle. But markets are looking for something late next year. If anything, markets are pushing ( a rate hike) toward 2016 — at this time,” he said.
“Things would have to be going exceptionally well for ( Bank of Canada policymakers) to go in May — exceptionally well.”
The OECD’s “non- consensus expectation” for when the central bank will begin lifting rates “would represent a significant about- face for the BoC,” said Mark Chandler at RBC Dominion Securities.
Policymakers have been “adamant, of late, that higher inflation was mostly due to transitory factors and that broader slack in the economy will not be eliminated [ for] about two years.” The consumer prices index rose by an annual rate of 2.4 per cent in October, while the core inflation reading — stripping out key volatile items, such as some energy and food products — advanced by 2.3 per cent.
The OECD on Tuesday forecast economic growth in Canada of 2.6 per cent in 2015, followed by 2.4 per cent a year later, with the help of a weak dollar and growing export demand — something the 34- member economic watchdog believes should spur long- awaited rebound in spending by companies.
“Business investment should strengthen with improved demand, to boost capacity and cost competitiveness,” the report said.
The Bank of Canada, in its October outlook, said growth would average “close to” 2.5 per cent in 2015 and then slow to “around two per cent” the next year, with the economy returning to full capacity in the second half of 2016 — slightly later than policymakers had previously forecast. Inflation is expected to settle at two per cent — the midway point of policymakers’ one per cent to three per cent target range.
Much of the renewed demand for Canadian goods and service will come from the United States, our biggest trading partner, where the economy is accelerating and unemployment is declining. The U. S. economy should expand by about three per cent in both 2015 and 2106, the OECD said.
Another indication of the growing momentum of the U. S. came Tuesday, when data showed that economy grew at a much faster pace than predicted in the third quarter — thanks to big gains in consumer spending and business investment.
Growth between July and September came in at an annualized rate of 3.9 per cent beating forecasts of a 3.5 per cent advance and marking the strongest six- month growth spurt in 10 years. Consumers contributed 2.2 per cent to growth and business investment grew by 6.2 per cent.
“That puts the ( U. S.) Fed on pace to raise rates around the middle of next year. We have them going in June,” said BMO’s Reitzes.
“For them, I think continued employment growth, the jobless rate coming down a little bit farther and [ average] three per cent GDP growth — that’s a recipe for rate hikes, if I’ve ever heard one.”
Pouring more cold water on the OECD’s rate forecast, Reitzes said the Bank of Canada “has made it abundantly clear that they’re not going to be front- running the Fed on rate hikes.”
“Our rates are at one per cent and the Fed’s is essentially at zero,” he said. Bank governor Stephen Poloz “has said a number of times that there’s still a meaningful amount of spare capacity in the economy and points to other measures of slack.”